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THE PRESCRIBED OFFICER

Kaitlyn Botha

Do you hold general managerial and executive decision making powers in your current position?  Do you lead from the front, instituting changes that affect the way your business functions and the systems it operates? Do you ever assist and advise in the legal affairs of the Company? If so, you could be a Prescribed Officer. Why is this important? Simple. You can and will be held at the same level of responsibility and liabilities to that of a registered director for any gross negligence and mismanagement.  As such, it is imperative that you are aware of your corporate positioning.
 
The legislative changes which have come into effect owing to the introduction of the new Companies Act[1] are vast. One of the most interesting additions to this new corporate dialect is the term “Prescribed Officer”. It is critical that every business is aware of who their Prescribed Officers are. It is also equally crucial that the aforementioned Prescribed Officers are fully apprised of and understand the risks associated with their corporate positioning.
 
What is a Prescribed Officer?
A Prescribed Officer is an individual who holds an office, title or designation of similar status to that of a director. The Prescribed Officer holds all the powers and functions held by any director of the Company, except to the extent that these powers, functions or duties are restricted by the Company’s Memorandum of Incorporation. The Prescribed officer also holds the same level of risk and liability as any director.
 
In terms of Section 66 of the Act, a Company is a juristic person and can only function on input from people.  It must be managed by or under the direction of its Board of Directors, which has the ultimate authority to exercise all of the powers and perform any of the functions of the Company. Taking into account that Prescribed Officers are required to perform their functions and exercise their duties according to the same standard of conduct to which directors are required to adhere, a Prescribed Officer includes every person, regardless of his or her title or designation, who:
 

  1. has general executive authority over the Company (for example, the Managing Director or Chief Executive Officer),

  2. has general responsibility for the financial management of the Company (for example, the Chief Financial Officer),

  3. has general responsibility for management of the legal affairs of the Company (for example, the Company Secretary or the in-house counsel),

  4. has general managerial authority over the operations of the Company and

  5. otherwise directly or indirectly exercises, (or significantly influences the exercise of) control over the general management and administration of the whole or a significant portion of the business and activities of the Company, regardless of whether this person holds any specified titled or designation.

 
It is not difficult to see how confusion may arise around point number five. This definition is quite broad and as such, could be open to interpretation. Ultimately, however, this definition means that any one person acting in a management role, such as the head of a division, could be considered a Prescribed Officer. For all intents and purposes, a Prescribed Officer is a person who exercises “general executive control over and management of the whole, or a significant portion of, the business and activities of the company. This could also be any person who regularly participates to a material degree in the exercise of general executive control over the management of the whole, or a significant portion, of the business and activities of the Company”[2].
 
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It is important to note, however, that neither the mere attendance of a board meeting, nor holding a title of Divisional Head or manager, automatically qualifies a person as a Prescribed Officer. Rather, it is the output or executive decision-making processes, leading to tangible change in whichever form that qualifies a person as a Prescribed Officer.

 
Previously, many individuals held responsible for wrongdoing or negligence will have put forward the argument that they were simply acting on instruction from a higher authority.  The introduction of this new role largely nullifies this argument. Although the Act refers to “Directors and Prescribed Officers” collectively throughout the legislation (predominantly Section 75 through 78), three areas of interest exist, owing to the far-reaching consequences created by the existence of this new position.
 

  1. Standard of Directors Conduct

Having to disclose interests of a personal nature within one’s business has been the norm for many years – this requirement is now extended to Prescribed Officers.
 

  1. Directors Personal Financial Interest

All directors are required to disclose their remuneration in their Annual Financial Statements, should those businesses be obliged to have their financials audited, as set out and determined by the Act. This mandate now extends to Prescribed Officers.
 
It should be noted that remuneration does not only imply payment for services rendered in the form of a salary, but includes any form of financial benefit received.
 

  1. Liability of Directors and Prescribed Officers

A common thread throughout this article is that Prescribed Officers can and will be held to the same levels of responsibility and liability to which directors are held. These levels of liability could include accountability for losses, damages or costs sustained by the Company as a result of any negligence or non-compliance with the code of conduct expected from Directors and outlined in a Company’s Memorandum of Incorporation or the Act.
 
Arguably, this could imply that whilst Prescribed Officers do not get the title of Director, they gain the risk associated with directorship. Although this may not seem fair, the Prescribed Officer exerts substantial control over the management, executive and strategic control of a Company and should, therefore, be held to the same levels of responsibility to which a director is held.
 
Although a great deal has been written about the role of the Prescribed Officer, case law is yet to be drawn up which clearly defines the full extent of this role. For now, though, it remains crucial that businesses identify who the Prescribed Officers are within their corporation, ensuring that these individuals are fully apprised of their corporate positioning and the consequences that result from this position. Ensuring that one’s Prescribed Officers fully understand the inherent risk of the role whilst providing the necessary tools to function as Prescribed Officer is the responsibility of the Board of Directors. It is imperative that the implications of knowing whether or not you are a Prescribed Officer should be taken very seriously in the ever-changing landscape that is the corporate governance arena.

 


[1] Companies Act, NO 71 of 2008.

[2]Mazars “Prescribed Officers – do you know who they are?” Ewald Van Heerden, December 2012.